'Payday loans' bill draws heated debate

A fight is brewing in Albany over legislation that would for the first time permit non-banks to make high-cost short-term loans in New York -- but at rates exceeding the state's usury limit.

The bill, pending in both chambers of the state Legislature, would allow licensed check-cashers to make small loans. Currently, check-cashers are barred from making loans.

The new loans would be limited to between $300 and $2,000, and would be for terms of at least 90 days but no more than six months. The bill includes other provisions supporters say will protect consumers.

Even so, consumer advocates, led by New Yorkers for Responsible Lending, denounce the proposed loans as tantamount to controversial "payday" loans that are common in many states but illegal in New York. They say passage of the bill would set a precedent and lead other businesses to say they should be allowed to make such loans.

"If this sucker is passed, that just opens the door to payday lenders in New York state," said Beverly Moore, housing coordinator at Buffalo Urban League. "Our objective is to kill the bill."

Consumer advocates are angry over a provision exempting the loans from the state's 25 percent usury cap on rates for small personal loans.

"What they're seeking is a carve-out of New York's usury law," said Sarah Ludwig, co-director of the Neighborhood Economic Development Advocacy Project, and part of NYRL, a coalition of 151 groups. "This is an example of an end-of-session bone-headed thing."

But the check-cashers and their supporters, including the bill sponsor, reject the criticism.

"These are not payday loans," said Sen. Hugh T. Farley, R-Niskayuna, the sponsor and former chairman of the Senate Banks Committee, during a May 18 committee hearing at which the bill passed. "They are comparing apples to oranges. It's being confused here."

In particular, they say, the maximum rate that could be charged would be set by state regulators, not left open. The supporters admit the bill would allow the rate to exceed the state's usury cap, but say the check-cashers have to be able to make a "reasonable" profit or they won't make the loans.

Check cashers also say they are in the best position to help with small credit needs because they're still in communities that banks have left, and they understand their customers.

"We're trying to do something that fills people's needs and does it in a responsible and regulated way, and nobody else is," said Edward P. D'Alessio, deputy general counsel for Financial Service Centers of New York, a trade group.

They say the alternative for consumers -- bounced-check fees, late fees on bills, or getting illegal loans from the Internet or elsewhere -- are worse.

"Unless the poor people have this opportunity, they are going to have to go to a loanshark, because they don't have the access to family and banks," Farley said. "When you need a loan you have to have it."

To which Sen. Liz Krueger, D-Manhattan, a member of the Banks Committee who opposes the bill, responded, "If this becomes the law, you might get better rates with loansharks."

Most licensed check-cashers are located downstate, but the industry has grown significantly in Western New York in the past year. Still, the area's four check-cashers are unsure just how much demand there is.

"We've had several calls requesting that type of thing, and we've always had to decline it," said Lance Rozell, owner of Castleway Financial. "I really don't know its profitability or viability in the area."

"I can't recall customers even mentioning it to me. I don't think they are as aware of it upstate as they are downstate," said Paul Virginia, co-partner of Western New York Check Services LLC on Fillmore Avenue.

The battle marks the most significant effort in recent years to bring payday lending or variations of it into a state that has long fought it. The check-cashers have been trying to get such legislation passed for several years, and a similar bill reached the Senate floor last year.

"They've been salivating to get this through," Ludwig said.

Payday lending refers to short-term loans, usually for about two weeks and in small amounts, that are based on the amount of an expected paycheck and repaid all at once. They are often used to help the borrower cover bills or sudden expenses. They're usually made in other states by check-cashers and other non-bank lenders, as most banks and even many credit unions won't make such small loans or the borrowers wouldn't qualify for them.

However, because of the extremely short duration of the loan, the flat-rate fees for every $100 borrowed often equate to annual interest rates of several hundred percent. And since many of the borrowers are short on funds, they renew and increase the loans an average of seven times, driving up the fees and debt. As a result, the loans have been denounced for years by consumer advocates.

The bill's supporters say that consumers already get payday loans -- about 8 million a year, according to a study by Cypress Research commissioned by the check-cashers -- so it would be better to regulate them to prevent abuse. And even opponents acknowledge a need for very small loans.

Under the legislation, loans would be capped at 25 percent of the borrower's gross monthly income. Payments would be made in installments every month or every two weeks, not in one balloon amount at the end, and the payments must equal no more than 10 percent of gross monthly income.

Borrowers may not take out more than one loan at a time, and the industry would fund a database of such loans to ensure compliance. Unlike a payday loan, these loans could only be refinanced once, if the borrower has made three straight on-time payments.

The bill includes the right of the borrower to cancel the loan for one day. No collateral would secure the loan, and the bill bans criminal prosecution to collect unpaid money.

Finally, the bill directs the banking superintendent to set the maximum rate, factoring in the check-cashers' operating costs and losses for the business, and ensuring a "reasonable" rate of return.

"You've got to have some reward for your risk," D'Alessio said. "Anybody who is going to go into an area and make small-dollar loans should be enticed to make at least a little profit. Otherwise, nobody's going to do it."

The legislation is opposed by the city of New York, labor unions, AARP and the Navy-Marine Corps Relief Society.

The bill has passed the Senate Banks Committee and is pending in the Finance Committee, as well as the Assembly Banks Committee. The governor has not weighed in. The state legislative session ends June 20.